How to Determine the Value of Your ECommerce Store

Running an ecommerce store can give you a lot more freedom than a traditional brick and mortar store, but you still may want to sell it one day. Before you can sell your business, you need to know the value of the business. While it is true that your business is worth what the market is willing to pay, you need to have an idea of how much money you can put on the price tag initially. In this article, we are going to talk about how to determine the value of your ecommerce store as well as what to do before you sell.

Ecommerce has become a very popular business model whether it is on sites like Etsy, eBay, Amazon or Shopify. Growing a successful ecommerce business can pay serious sums of cash. Here are some ways you can determine the value of your ecommerce store.

Using Proper Valuation Methodologies

The best way to determine your ecommerce store value is through the use of proper valuation methodologies that have already been put in place.

1) Multiple of Seller Discretionary Earnings

Historical earnings are what most valuations look at when determining value. The net profit for the last twelve months of the business with the application of a multiplier which is typically between 1.5 and 3.5 while some calculation put the multiplier up to 5 to get the company’s value.

The multiplier is determined by a number of factors that the seller, broker, and buyer agree as relevant. Some of those factors are consistency, revenue growth, the ability to scale and the work that is required to operate the business. The more favorable factors that are in play, the higher the multiplier is and the higher the valuation will be.

2) Discounted Cash Flow Analysis

Discounted cash flow (DCF) analysis is another valuation method that is commonly used. DCF analysis is an estimate of future return on the investment with an adjustment for the time value of money received today is worth more than it is today. Last year’s free cash flow (FCF) is calculated by DCF by the subtraction of capital expenditures from the period’s operating cash flow. The cash flow growth rate over five years is then projected and discounted according to its weighted average cost of capital (WACO) of the business.

Traditional businesses that have an established history of stability can come to a reasonable valuation through DCF, but with ecommerce stores, it can be more difficult because of the wide variance and volatile nature of the business. While it can be used, it isn’t recommended as the primary determinant.

3) Precedent Sales

Another valuation that should not be used on its own is precedent sales. Valuation criteria for business can be different even if they are in the same industry and may not be relevant to a particular situation. Looking at this means of valuation is more to give you an idea of what is happening in the industry vs. giving you a true value of the business.

Factors That May Raise or Lower the Value of the Business

Traffic is a major factor to look at when you are deciding the value of a business. Seeing that a website has traffic isn’t necessarily the only thing you need to see. Not all traffic is created equally. You need to look at where the traffic is coming from, what it is doing and other important factors.

The amount of time an owner has to spend in the business is another major factors when it comes to ecommerce stores. Many people love ecommerce because they think it is going to free their time and allow them to do things they love. Potential buyers are likely to look at the amount of time the owner spends on the business as one of the things that would raise or lower the cost of the business.

Financials and operations are another area that needs to be looked over carefully and displayed properly so buyers understand what is happening with the business. If your financials are not easy to understand, there are likely to be many questions that could cause problems with your sale.

Get Help Selling Your Business

If you are confused about how to best present your business and how to get buyers, you can visit sites like Digital Exits to find a broker. Finding the right broker that understands how to sell ecommerce business is important. Ecommerce businesses are different from traditional businesses, so you want to make sure you work with a broker that knows what they are doing.

Make sure to ask for the broker’s resume and what relevant experience they have dealing with selling ecommerce stores. If they don’t have any experience, you want to move onto someone that does know how to work with your specific type of business.

Conclusion

Selling your ecommerce business can be exciting, but you also need to think of selling a business as a marathon and not a sprint. Selling something like a business isn’t like selling a car, and it can take time for people to make a decision, find funding and more. Understanding that it can take as long as two to three years to sell your business will allow you to keep from getting frustrated when things are moving along as fast as you would like them to go.